Introduction:

The reaction of economic-policy makers around the world in response to the financial crisis of August 2007 was to initiate monetary and fiscal measures. The result of those measures was to contain a potentially "great depression" to eventually a "great recession". In fact, governments around the world did step in with their own balance sheets and managed to offset the massive deleveraging in the rest of the economic system. A global depression was thereby avoided, as an unprecedented degree of international coordination emerged. The climax was reached at the April 2009 G20 meeting in London. El-Erian (2010: 4) strongly suggests that "It was global coordination at its best", although the same author notes that "the actions were 'correlated' rather than 'coordinated'"(El-Erian 2010: 15). Be that as it may, "[t]he design and implementation of measures were well coordinated! (El-Erian 2010: 4). But while those initial monetary and fiscal measures were successful, the post-'Great Recession' experience has been disappointing; for no sooner did that ‘success’ story become obvious, a new disappointing period evolved.

There are clear policy implications that emanate from the crisis. To begin with, it is important to state that prior to the "Great Recession" there had been clear acceptance of the Efficient Market Hypothesis (EMH), with the focus on 'light-touch regulation'.

It is also the case that the IMF praised these approaches and recommended them to other countries. All these policy initiatives have been discredited by the events that led to the 'Great Recession'. These and other policy implications are briefly discussed in this contribution to conclude that an important policy that has not been addressed properly is that of financial stability. In fact, the emergence of Central Bank independence, focusing exclusively on maintaining price stability, along with the use of the rate of interest as the main instrument of economic policy, that is inflation targeting, implied that the objective of financial stability was downgraded and responsibility over it became obscure. We, thus, discuss the latter policy at some length, emphasising the recent U.S. initiative that emerged as the Dodd-Frank Act of 2010, which is the focus of the discussion on this front.

We proceed as follows: After this introduction in Section 1 we discuss the economic policy implications in Section 2. This is followed in Section 3 by a discussion that focuses on the recent financial stability policy initiatives. Section 4 focuses on the U.S. Dodd-Frank Act of 2010, since this seems to be the one initiative that is more complete than the rest. Finally, we summarise and conclude in Section 5.